This week has seen gold and silver prices attempting to find their footing in a market filled with uncertainty.
In the European trade this morning, gold has settled at $2,022, down $7 from the previous Friday’s close, while silver has reached $22.92, marking a 30-cent increase.
Comex turnover has been moderate, with an interesting observation that expiring options and contracts have yet to trigger significant volatility. Hoever, an underlying suspicion looms, suggesting that the support level of $2,000 for gold may be on the brink of being breached, especially in the paper markets. The sentiment appears lukewarm, reflected in the actions of hedge funds, where net longs on Comex stood at a mere 83,229 contracts as of January 16th, compared to a long-term neutral position of 110,000.
Since January 2020, gold prices have surged by 40%
The indifference in the market is striking. Since January 2020, gold prices have surged by 40%, yet net long positions have more than halved, albeit starting from overbought levels. Remarkably, this rally in gold prices has occurred without substantial buying by market traders. Despite this, technical analysts examining gold price charts maintain an optimistic outlook. Here’s what’s happening next.
$2,000oz for Gold support is not an insurmountable barrier
Currently, the price is finding support at the 55-day moving average. However, even if this support falters, a deeper correction should find robust backing at the 12-month moving average, currently situated at $1,950. It’s not out of the question to consider a sell-off, designed to mislead observers into thinking that the $2,000 support is now an insurmountable barrier, although, from an economic standpoint, this should be viewed as a buying opportunity.
Gold, historically provided currencies with their credibility as substitutes for money
So, the technical indicators are signaling positivity. However, we must navigate markets driven by Keynesian principles that often disregard credit nuances, mistakenly viewing currencies as money. This fundamental misunderstanding has marginalized gold, which historically provided currencies with their credibility as substitutes for money. This misconception is why rising interest rates and bond yields are viewed as detrimental to gold—a sentiment that has weighed on markets in recent weeks, as indicated in our next chart.
Since December 27th, the yield on the 10-year US Treasury note has climbed by 40 basis points, breaking its downtrend. From a technical perspective, it’s too early to draw definitive conclusions, but there are some concerning developments on the horizon. The oil price has experienced a sudden 10% surge for reasons not immediately apparent. While factors like the Houthis disrupting global trade routes might contribute, it’s just one of many indications challenging the prevailing low inflation narrative.
Understanding why gold can rise alongside inflation and bond yields necessitates rejecting the Keynesian belief that fiat currencies are money. In reality, they represent credit exposed to counterparty risk. In the case of the US dollar and other major currencies, rising interest rates exacerbate the government’s debt dilemma, particularly in the face of an impending economic downturn.
These conditions highlight the counterparty risk associated with holding dollars. Contrary to popular belief, it’s not that the gold price is ascending; rather, it’s the dollar that’s descending into a realm of uncertainty. The unsettling reality of our monetary system continues to unfold.
